MISC FY17 core net profit below forecast, lower earnings ahead

CIMB Research: “We maintain Hold as there are few catalysts for the stock."

CIMB Research: “We maintain Hold as there are few catalysts for the stock."

KUALA LUMPUR: MISC’s FY17 core net profit was 3% below CIMB Equities Research’s forecast and consensus, due to a US$22mil impairment on trade receivables of its Yemen LNG contract in 4Q17.

The research house said on Wednesday it expects FY18F core EPS to be slightly lower than FY17, as higher LNG and AET profits may be offset by lower construction profits from the FSO Benchamas 2.

“Our sum-of-parts based target price has been lowered mainly on account of the stronger ringgit; we now assume RM4:US$1 by end-FY18F, from RM4.30 previously. 

“We maintain Hold as there are few catalysts for the stock,” it said.

It lowered the target price from RM7.41 to RM6.87. MISC’s last traded price was RM7.08.

CIMB Research said MISC’s 4Q17 core net profit of RM116.5m was down 15% on-year due to its Yemen LNG contract. 

“We do not consider this to be exceptional in nature, as the closure of Total’s Yemen LNG plant may continue for some time, due to the ongoing civil war in the country. 

“Stripping out the above impairment, MISC’s 4Q17 core net profit was flat on-year, due to a mix of ups and downs.   

“Full-year core net profit rose 5.7% on-year (or +10% on-year excluding the LNG receivable impairment), on the back of stronger LNG profits due to the delivery of three new LNG vessels from October 2016, strong offshore profits due to contribution from FSO Benchamas 2 construction profits, and higher MMHE profits due to the 4Q17 spurt arising from variation orders and finalisation of contract work,” it said. 

CIMB Research said this was partially offset by AET’s decline into losses as a result of the weaker tanker rates post OPEC production cuts. 

The research house said MISC recognised US$137m in asset impairments in 4Q17 (US$53.5m impairment on five LNG vessels, US$76.5m impairment on seven chemical tankers, and US$7m across other assets), although this was partly offset by US$43m reversal of provisions made against the value of its MOPU assets that was charged back in 1Q17. 

Other notable exceptional items during FY17 include US$83.5m one-time gain and reversal of doubtful debts provision as a result of a favourable adjudication award on Gumusut-Kakap. 

“We forecast MISC to report lower offshore earnings in FY18F as a result of the cessation of accounting for construction gains from the FSO Benchamas 2 project. 

“On the LNG side, the full-year impact from the end of the Tenaga 5 and Puteri Firus charters in 2Q17 will be felt in FY18F, but will be more than offset by the full-year contribution from the Puteri Cempaka newbuilding that was delivered in September 2017, plus the delivery of two more newbuildings in February and April 2018F, respectively.

“On the other hand, if MISC has to again impair another US$22m of trade receivables in 4Q18F in relation to the Yemen LNG contract, FY18F core net profit could fall by a more significant 7.4% on-year. 

“On the basis of the undertaking given by Yemen LNG that it will honour its charter contracts for the Seri Balquis and Seri Balhaf, MISC is continuing to recognise full charter hire on those two vessels that have been contracted until 2029F.  

MMHE noted at its analyst briefing that it expected a very difficult 1H18F, due to the slow progress of the Bokor project in 1H18 (with steel cutting only expected to commence in 3Q18F), while many of its projects were already completed in FY17. 

However, CIMB Research expects AET to turn around in FY18F as it explores various ways to reduce chemical tanker losses, including sale of vessels.

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